23rd Muresk Lecture; Muresk Institute

It is a great pleasure to be invited to deliver the 2015 Muresk Lecture. I would like to acknowledge Mr Neil McAullay, Acting Managing Director of the CY O’Connor Institute; Professor Christine Storer, Head of the School of Agribusiness at the CY O’Connor Institute; Mr Tim Wess, Dean of Science from Charles Sturt University; Deborah Moodey, traditional owner; and Brianna and Rachel, representatives of the Muresk Student Association.

I have experienced professional work as a politician, a lawyer and an economist – three professions that often attract some level of frustration from the community. People find they often disagree with politicians and people often find lawyers just disagreeable. But, what people find frustrating about economics is that economists can never seem to agree amongst themselves.

If economics is a science then why is it that economists cannot agree on important foundational basics like physical scientists can? The lawyer and politician jokes are never as funny to me as the economist jibes. I heard recently a description of an economist that goes: a scientist is someone who develops a theory and tests whether it works in practice, an economist sees something work in practice and spends the rest of their of life seeing if they can make it work in theory.

Perhaps the greatest example of this sort of criticism came from the mathematician and thermonuclear bomb designer Stanislaw Ulam. In 1969, Ulam famously challenged the Nobel Laureate economist Paul Samuelson to come up with one economic theory that was both true and nontrivial. What a stunning question this was. If you cannot find one single theory in your own profession that is both important, and upon which everyone in your profession can agree, that is a devastating criticism of the entire profession.

It took Samuelson several years but he eventually responded to this devastating question with an equally devastating answer – his answer was David Ricardo’s 1817 theory of comparative advantage in trade. The principle in Ricardo’s 1817 book, Principles of Political Economy and Taxation, is simple, undeniably and provably true and of colossal importance.

For Australia, our future as a successful exporter is the single most important issue for our lives and that of our children and, speaking tonight in the Wheatbelt, we are in the trading centre of a trading state so I can safely say there is no more important issue that is presently facing our nation than the debate in respect of the China-Australia Free Trade Agreement (China FTA). And so, it is this critical agreement that I have chosen as the subject of this Muresk lecture address to you tonight.

To anticipate the conclusion of this address, I want to put to you a simple proposition; that the China FTA is both incredibly important to, and massively positive for, Australia and that this is just as provable as the beneficial truth of the original theory of free trade that inspires the agreement.

To prove the immense benefits of the China FTA, this presentation will look at three things: what the China FTA does not do; what the China FTA does actually do; and what the consequences might be if it were to, at this late hour, come undone.

What the China FTA does not do

By now you would have all seen the claims about the China FTA being made and aired in a massive union funded advertising campaign. To coarsely summarise those claims, here they are: that the agreement will lead to large numbers of dangerously unskilled Chinese workers coming to Australia and taking jobs that would otherwise go to local workers.

This is a monied, orchestrated campaign that is being directly supported by many – but thankfully not all – members of the Labor Party.

The Electrical Trade Union has run what are known as robo-calls into targeted electorates. The recorded telephone message asserts that the China FTA will allow unqualified electricians to work in Australia putting the safety of Australians at great risk.

Winston Churchill once said that that a simple lie is half way around the world before a complicated truth has had a chance to put its pants on. This scare campaign, like all good scare campaigns, takes small issues out of their overall factual context and then constructs a simple lie around the misrepresentation. Unfortunately, the only way to combat simple lies is with more complicated truths. So, to commence with, it is worth testing three scare campaign assertions against the actual facts.

Scary Claim Number 1: Chinese workers will take jobs that otherwise would go to local workers

This claim relates to small changes to the application of what is known as labour market testing (LMT) and a threshold change to projects subject to what are known as infrastructure facilitation arrangements (or IFAs).

The China FTA is the same as our previous FTAs in being consistent with our undertakings in the WTO: to allow foreign companies to bring in their corporate executives and managers on a temporary basis.

In all of our FTAs (including those signed by Labor), Australia has made a commitment to exempt from labour market testing certain individuals applying for temporary entry work visas: business executives as intra-corporate transferees; senior managers as intra-corporate transferees; independent executives; and certain skilled workers who are defined as either ‘specialists’ or ‘contractual services suppliers’.

Applications for temporary entry in these categories are managed under the sponsor-driven 457 visa arrangements. Under the China FTA this remains the same but with two minor modifications.

There is proposed an additional category of exempted persons known as ‘installers and servicers’. Someone is an ‘installer and servicer’ where the installation and/or servicing of equipment by the supplying company is a condition of purchase of the said machinery or equipment. An installer or servicer must abide by Australian workplace standards and conditions and cannot perform services which are not related to the installation or servicing activity which is the subject of the contract. Importantly, these workers already have access under Australia´s Temporary Work (Short Stay Activity) 400 visa subclass and our commitment will not change this.

As well as this limited change for installers or suppliers, a commitment has been extended to four other China-specific occupations, but only for a combined total of up to 1,800 people per year. It applies to: Chinese chefs; traditional Chinese medicine practitioners; Mandarin language teachers; and Chinese martial arts trainers (a similar commitment was made in Australia’s FTA with Thailand regarding Thai chefs).

So, are a limit of 1800 traditional Chinese practitioners of Chinese cooking, Chinese martial arts and Chinese medicine and a small number of specific installers who are already able to work in Australia going to steal jobs away from Australians? The rational answer is no.

The IFA is a Memorandum of Understanding (MOU) that sits alongside the China FTA and is also relevant to the issue of labour market testing. It would give Chinese companies registered in Australia the possibility – but not the guarantee – of using some foreign skilled labour (paid under Australian conditions), but only in the event of established and proven local skills shortages which would otherwise hinder the completion of a part-built project. IFAs simply provide certainty of access to a known streamlined process that can lead to the use of 457 visas, but not the certainty of such an outcome.

The only relevant change to the IFA accompanying the China FTA is that it lowers the investment threshold for relevant projects to be able to access the process from $2billion to $150million.

But, again, the scheme simply offers investors the certainty of a process; investors will be able to pre-negotiate with the Immigration Department an arrangement which may permit temporary overseas skilled labour to be employed, subject to the usual conditions and wage levels as per the existing 457 scheme. The pre-negotiation alerts the Immigration Department that contractors to the investment project might at some future point look to approach Immigration at the time of peak labour requirement.

In the real world of big projects – big projects that employ thousands of Australians and build critical Australian Infrastructure – this pre-warning process gives the investor greater confidence to invest and gives Immigration advance notice of the possibility of a potential future application, which is logically preferable to a panicked application for 457s during construction if the relevant labour shortages eventuate.

Non-Chinese companies facing a similar situation today can approach the Immigration Department to bring in specialist skills under the 457 visa programme but just not under this streamlined process. Indeed, the avenue is also open to Australian employers and, crucially, the whole process is actually more stringent than labour market testing. That is, more stringent than simply requiring the project to advertise certain jobs, because the IFA process requires employers to provide evidence that: there is a genuine and systemic shortage of skilled workers; there are no suitably qualified Australian workers available; and the project investor has a commitment to training Australians.

AMWU NSW secretary Tim Ayres claimed that, “this deal will mean that on very ordinary construction projects in our cities and our suburbs … [it] will allow the company to import Chinese workers at lower wages and conditions, denying young construction workers and young apprentices the opportunity for work”. That sounds frightening but it is simply not true.

Will allowing the Immigration Department to choose to test the existence of a skills shortage in a project over $150million by requiring certain jobs be advertised or by other more stringent investigative mechanisms result in Chinese workers taking Australians jobs? The rational answer is no.

Scary Claim Number 2: Unskilled and “so dangerous” Chinese tradespersons will be working in Australia

An IFA requires Chinese companies to be registered in Australia and therefore to comply with all Australian laws and employment terms and conditions. So, it is simply impossible to argue that anything in the IFA process would allow unskilled and dangerous tradespersons to work in Australia.

A Side Letter agreement to the China FTA does make one minor change of reducing from 25 to 15 the skilled occupations subject to mandatory skills assessment for Chinese applicants for a temporary skilled migration visa (457 visa). These occupations include automotive electrician, cabinetmaker, carpenter and electrician. There is also a commitment to review the remaining 15 occupations with a view to better recognising Chinese trade qualifications.

Under Australia’s general temporary skilled migration program, skills assessment is not mandatory for workers coming from most countries and not mandatory for all skilled occupations. For most countries, the Department has the discretion to rely on evidence ‘on the papers’ – such as proof of qualifications. Skill assessment is mandatory for only 25 trade occupations for workers from 10 specified countries. These 10 countries are Brazil, China (including Hong Kong and Macau), Fiji, India, Papua New Guinea, Philippines, South Africa, Thailand, Vietnam, and Zimbabwe. The Side Letter merely agrees to move China from this list to the discretionary group (in which most countries reside) but only for 10 of the 25 relevant occupations, meaning an assessment could be required for those 10 professions but is not mandatory.

Notable, as a final point on the skills issue, is that skilled workers in Australia, wherever they are from, must go through skills testing to gain accreditation from State Governments. So, when the Queensland State Trade Minister, Jackie Trad, complains about supposedly unskilled Chinese tradespeople being eligible for 457 visas, is she being mischievous or is she actually ignorant of the fact that her own State Government is the final guarantee of appropriate skills for tradespeople on 457 visas?

So, will allowing the Immigration Department to accept documentary evidence of equivalent qualifications for 10 new categories of Chinese professionals (while always reserving the right for further scrutiny), plus the accreditation processes of State Governments result in unskilled and dangerous Chinese workers? Of course not.

When the Labor Member for Bendigo, Lisa Chester, makes the statement in Parliament that, “you could call an electrician to come to your house and not know whether they have Australian qualifications and safety standards,” the suggestion is, in fact, preposterous.

Scary Claim Number 3: Lower wages and conditions

No concessions are available under the IFA on the need to pay market wage rates and comply with all workplace laws; for any 457 visa to be issued the employer must pay market rates of pay, with a minimum income threshold of $53,900, and meet all requirements under Australian workplace laws. There is simply no avenue through the IFA for ‘cheap Chinese workers’.

On this point, it is notable that unions representing some of Australia’s lowest paid workers themselves regularly use imported labour; United Voice employs nine people on 457 visas.

Listening to the union campaign you would be forgiven for thinking the 457 visa is all about Chinese workers, however, the number of 457 visa holders from China account for only 6 per cent of the total and, since mid-2013, responding to the wind-down in construction, the number of 457 workers in Australia has decreased.

This debate is on the edge of becoming racist. Maybe saying it is only on that edge is being generous to the union movement; CFMEU national secretary Michael O’Connor said point-blank that opposition to the China FTA was “about stopping greedy bastards trying to steal Australian jobs”.

But why is it that there is bipartisan support for the Japan and South Korea FTAs that have the same structural composition but there is a full-blown, dishonest scare campaign reserved specifically for the China FTA – even though it is essentially the same as the other two and even though Chinese workers are only 6 per cent of 457 visa holders and 457 visa numbers have been decreasing?

One explanation is that the vast bulk of 457 visa holders choose not to be union members. More likely, emotion has simply blinded reason.

But all is not yet lost because decent rational Labor Party figures with the nation’s best and real interest at heart are resisting the union campaign against the China FTA. Martin Ferguson, Simon Crean, Peter Beattie, John Brumby, Bob Carr and, most recently, Bob Hawke all acknowledge how important the China FTA is to our future – as well as all the Labor Premiers.

What the China FTA does do

I have found myself falling into the classic lawyer’s trap of spending 15 minutes telling you what the agreement does not do, but the unions forced me into it.

The best way to explain what the China FTA will do for us is by examples and facts.

China is Australia’s largest trading partner. It buys almost a third of all Australian exports, valued at nearly $108billion in 2013-14, and is our top overseas market for agriculture, resources and services exports. Over 85 per cent of Australia’s goods exports to China (by value in 2013) will enter duty free when the China FTA enters into force, rising to 93 per cent after four years and 95 per cent when the agreement is fully implemented.

I should note that this speech just focuses on the China FTA, but this is the final of the trifecta with our three major trading partners and, in summary of the joint effect, modelling by the Centre for International Economics shows our three new agreements with China, South Korea and Japan will create thousands of jobs, make households $4,348 better off, and boost GDP by $24.4billion between 2016 and 2035. Together, these three countries account for more than 55 per cent of our total goods and services exports.

Of course, one obvious area of Australia’s comparative advantage is in rural industries and the export, domestic employment and wealth generating opportunities for the people around us tonight are just staggering.

Agriculture

China’s demand for high-quality agriculture and food products is growing at an astonishing rate. ABARES predict that China will account for 43 per cent of global growth in agricultural demand by 2050.

Until now, the absence of a bilateral FTA with China has meant Australian producers and exporters have been at a competitive disadvantage to countries that have an FTA with China including New Zealand, Chile and the Association of South East Asian Nations (ASEAN).

The China FTA addresses this issue, and gives Australia a fantastic head start to market penetration over larger players, such as the US, EU and Canada. Some examples include:

Beef

The OECD assesses that beef will be the fastest-growing import sector in China. Australian beef exports to China already set new records in 2013-14, totalling 161,000 tonnes worth $787million. This was up from 93,000 tonnes ($408million) – more than a 73 per cent increase in 12 months.

The China FTA: eliminates tariffs on beef imports (currently ranging from 12-25 per cent) within 9 years; and eliminates the 12 per cent tariff on beef offal within 4-7 years.

The Meat and Livestock Association estimates an $11billion boost to the meat and livestock industry to 2030; our red meat industry estimates benefits over the next 15-16 years of $3.3billion to the beef industry; $1.8billion in sheep meat; and $6billion for the sheepskin, hides and offal industry.

Dairy

China is Australia’s largest market for dairy exports, with exports almost doubling recently, to more than $443million in 2013-14. Australia’s main competitors are New Zealand, the EU and the US.  Currently, New Zealand’s dairy produce receives a considerable tariff advantage under its bilateral FTA with China.

The China FTA: eliminates the 15 per cent tariff on infant formula within 4 years; eliminates the 10 – 19 per cent tariff on ice cream, lactose, casein and milk albumins within 4 years; eliminates the 15 per cent tariff on liquid milk within 9 years; eliminates the 10 to 15 per cent tariff on cheese, butter and yogurt within 9 years; and eliminates the 10 per cent tariff on milk powders within 11 years.

Wine and spirits

China’s wine import market is growing dramatically, more than doubling in size since 2009-10, to be worth over $1.6billion in 2013-14. China is Australia’s third-largest export market for wine, worth $201million in 2013-14. However, Australia competes with New Zealand and Chile, both of which have preferential wine access under their FTAs with China. China’s wine imports from Chile have increased seven-fold since its FTA with China entered into force in 2006.

The China FTA: eliminates tariffs of 14 to 20 per cent on Australian wine imports within 4 years; and eliminates tariffs of up to 65 per cent on other alcoholic beverages and spirits within 4 years.

Seafood

Australian seafood exports to China totaled $37million in 2013-14.

The China FTA eliminates tariffs on all Australian seafood exports progressively over 4 years. The Agreement will create a huge opportunity for Australian seafood in the Chinese market. Since the China New Zealand FTA came into force, China’s imports of seafood from New Zealand have quadrupled (to $356million).

And what does all this mean on the ground?

Fletcher International Exports is one of the largest meat exporters in the country and employs more than 1,200 people Australia-wide. Director, Roger Fletcher, says the China FTA is the best move for the sheep meat industry in 20 years. In eight years’ time when the agreement is in full swing, Roger said he expected to see a return of about $150million a year.

Western Australia’s Burch Family Wines say the FTA with Korea had an impact from announcement, with a 50 per cent increase in sales on the back of it and they’re gearing up for their move into China.  CEO, Jeff Burch, said, “The big prize for us is China … The government has created the opportunities, but it’s now up to the individual businesses to do the hard yards.”

But it is not just the agricultural sector where new growth and jobs will be generated.

Industrial

China is by far Australia’s largest market for resources and energy products. In 2013-14, Australia exported over $90billion worth of resources, energy and manufactured products to China.

On entry into force, 92.9 per cent of China’s imports of these products from Australia will enter duty free, with most remaining tariffs removed within four years. On full implementation, 99.9 per cent of Australia’s resources, energy and manufacturing exports will enjoy duty free entry into China.

And then there are new growth industries that you would never have expected. For Pharmaceuticals, including vitamins and health products, the China FTA eliminates tariffs up to 10 per cent or within 4 years. Car parts and engines, plastic products, opals and other precious stones – elimination of tariffs on these and other manufactured products will take place within 4 years of entry into force. Under the China FTA the 10 per cent tariff on caravans will be eliminated. This list truly does go on and on. This is what the unions are campaigning to stop.

On top of all these benefits, Australian consumers will also pay less for household goods, electronics, clothes and other goods from China – making the China FTA the mother of all cost of living reduction policies. This brings me to the unimaginably awful consequences of the China FTA not getting through the Senate.

What the consequences might be if the China FTA were not concluded

The National Farmers Federation (NFF) says delay will cost rural communities alone $300million in 2016.  Simply put, agricultural and a wide range of other Australian industries would continue to suffer as major competitors, such as New Zealand, continue to enjoy preferential treatment after having already signed agreements. Failure to ratify will cost the red meat industry $100million, dairy up to $60million, wine up to $50million and grains more than $43million. The coal industry says that every week of delay will cost it about $4.6million per week in extra tariff payments on thermal and coking coal, risking jobs at some mines already right on the edge.

But the real tragedy of not passing the China FTA is that we stall or kill the growth in a whole range of new industries that could be the next big thing in Australian wealth and Australian job creation. The Financial Services Council warns that if the China FTA is stopped it would cost our economy more than $4billion and almost 10,000 jobs in financial services alone by 2030. And this is just financial services.

The lost opportunity for growth into a massive Chinese market with growing demand for all sorts of services would be a national tragedy. And so, perhaps the final and most critical point to make this evening is simply that killing the China FTA could kill the growth of exports in service industries that could otherwise be the linchpin of our economic future.

It drives me mad when Labor on the one hand talk about innovation, technology and new job creating sectors of the future and then stand on the precipice of killing the key agreement that would give real life to a whole range of job creating innovative service industries.

For a high skill, high labour cost economy; the services sector is where quality jobs growth is to be had in Australia. Right now – today – 9 out of 10 jobs in Australia are in the services sector. But while services account for around 70 per cent of our economy, they represent perhaps, at best, 20 per cent of our total exports. Lifting up that 20 percent of exported services is the jobs growth future for our economy, and the demand for services and the range of services we could export to China are near limitless.

Australia has literally hundreds of areas of expertise including: architecture and design; engineering; environmental services; transport and logistics; IT; tourism and hospitality; through to healthcare aged care; education; and vocational training – the list goes on.

Free trade agreements, along with the digital age and growing air transport connectivity, provide a cost-effective opportunity to expand Australian service businesses from a market of 23 million people at home, into markets involving ultimately billions of people. And, on this point, the China FTA includes a Most-Favoured Nation (MFN) clause.

This clause guarantees Australia’s competitive position into the future because if China extends any more beneficial treatment to any other trade partners in the sectors of: education; tourism and travel-related services; construction; engineering; securities; environmental services; services relating to forestry; computer and related services; and certain scientific and consulting services, then we get equal to the best deal going.

Under the China FTA, China has offered Australia its best-ever services commitments in any FTA (other than China’s internal agreements with Hong Kong and Macau).  This includes new or significantly improved market access for: Australian banks; insurers; securities and futures companies; law firms and professional services suppliers; education services exporters; as well as health; aged care; construction; manufacturing and telecommunications services businesses in China.

The opportunities are staggering. For example, expenditure on health care in China is forecast to go from US $295billion in 2010 to US $1.02trillion in 2018. China will permit Australian service suppliers to establish profit-making aged care institutions throughout China, and wholly Australian-owned hospitals in certain provinces. This will greatly expand the Australian private health sector’s offering of medical services through East Asia.

One of Australia’s most lucrative exports to China has been our education sector.  As at June 2015, there were 124,000 Chinese on student visas in Australia; more than a quarter of the total. China is our largest source of international students (about 29 per cent of the total), and is our largest source of tourism expenditure (18 per cent of the total).

The simple fact is that, even though China is Australia’s largest services market with exports in services valued at $7.5billion in 2013-14, an honest appraisal is that Australia’s export of other services to China has been less than impressive to date. However, the China FTA lays the foundation for supercharged export growth across service sectors which could underpin our economic prosperity for generations.

Conclusion

By way of conclusion, my proposition tonight is an essentially simple one, and one that is provably true: the proposition is simply that trade can make us a wealthy, high employment, high wage nation.

The evidence of this is everywhere – recent quarterly growth numbers show that of our 0.9 per cent growth in the March quarter, 0.5 per cent – more than half – came from net exports. That is, from trade. If Australia was not so active in its pursuit of trade liberalisation and in the attraction of foreign capital, we would be a demonstrably poorer nation because of it.

Right now, unions oppose free trade on the basis that is decreases jobs, but every single available fact shows that the China FTA would grow jobs enormously. Right now, one in five Australian jobs is linked to trade and the central point is that growing trade is the path to growing jobs. If trade is Australia’s future, then China is the future of trade.

Australian exports to China already account for nearly 6 per cent of Australia’s GDP, making it Australia’s largest trading partner. Worth $100billion dollars annually, Australian exports to China are more than the combined value of Australia’s exports to the United States, Germany, the United Kingdom, South Korea, France, Canada and all of South East Asia.

At this moment, among the billions of people who live in India or China, or in any country in between, 600 million of those people are in the middle class. It is estimated by the OECD that within 35 years – not 100 years, or 50 years – but within 35 years, that 600 million people in the middle class will grow to some three billion people, living in the middle class in the region around us. This represents an unprecedented economic phenomenon, as well as a humanitarian miracle, as billions of people move out of poverty.  And China leads that growth in middle class consumer demand.

The rebalancing of the Chinese economy, which has been the goal of the Chinese national government for many years now, is starting to bear fruit. Domestic consumption, which a few years ago was about a third of GDP, is now rising towards 50 per cent.

Critically for Australia, Chinese consumers have not just converged in massive numbers into a middle class lifestyle; they have embraced online retail more than just about any other country. Online retail accounted for around 10 per cent of overall sales at the end of 2014, with spending at almost half a trillion dollars during the year.  This means that the Chinese online retail market is now larger than that of the U.S. It is forecast to rise to 13-14 per cent by the end of the year.  By contrast, online retail accounts for around 7 per cent of sales in Australia and around the same portion of sales in the United States.

If the China FTA is confirmed, then never before has it been so easy for Australian businesses of all sizes, across just about every industry, to reach new and expanding markets in China with products at competitive prices because of comparative advantage and radically lower tariffs.

There is a pessimistic modern sentiment that politics is failing – that the political process fails to produce outcomes that make our lives better. I am only in politics because I do not share this pessimistic view – I see the ability of modern politics to make our lives better. No better example exists than the China FTA; a decade long political process that could revolutionise our economy and provide the ultimate gift of politics to people – that of wealth and jobs for future generations.

During the GFC people talked about banks being ‘too big to fail’. The China FTA is too important to fail. If, after 9 years and 21 rounds of negotiation under the time of three governments, it were to now fail in the Senate, this failure would be a national tragedy beyond comprehension which would scar our economic development for generations.

I thank you all for your time tonight and hope that this evening’s Muresk lecture adds modestly to the rational political discourse of good decent Australian politicians on both sides of the political fence who cannot stand by silent while Bill Shorten and the union movement push the Senate to snatch defeat from the jaws of what could be one of our nation’s greatest ever economic victories.

 

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